Mercer Estimates 38% of Employers to be Penalized for Unaffordable Coverage

April 27, 2010 (PLANSPONSOR.com) - More than a third of the nation’s employers have at least some employees for whom coverage would be considered “unaffordable” under the newly enacted Patient Protection and Affordable Care Act (PPACA), according to a new analysis of data from Mercer.

Using a calculation that compares the contribution requirements for an employer’s most subscribed medical plan to the average full-time employee salary in their organization, Mercer found that 38% of all employers have at least some employees for whom coverage would be considered unaffordable. Mercer noted that while this percentage might be lower if household income rather than employee salary were considered, the employers identified by this calculation are clearly at risk for incurring the penalty.

Mercer’s analysis finds that a somewhat lower percentage of large employers are at risk (large employers tend to both charge less for coverage and pay employees more). Thirty-one percent of all employers with 500 or more employees and 20% of those with 20,000 or more employees are at risk for incurring the penalty.

Under the rule that employers provide affordable coverage, full-time employees must generally be asked to pay no more than 9.5% of their household income for coverage, Mercer explained. If employer coverage is unaffordable by this definition, and at least one employee receives government assistance to buy individual coverage through a health insurance exchange, the employer must pay a yearly penalty of $3,000 per full-time employee who gets government assistance and buys coverage in an exchange (to a maximum of $2,000 times the number of full-time employees in excess of the first 30), starting in 2014.

A Mercer news release said apart from employers that don’t currently offer coverage at all, reform may have the biggest impact on employers with large part-time populations that don’t provide coverage to any part-time employees or require them to work more than 30 hours per week for coverage eligibility. Under the “shared responsibility” requirement, all employees working an average of 30 hours per week or more in a month must be eligible for affordable coverage, or the employer may be subject to a penalty.

Mercer found only about half (51%) of all large employers currently offer coverage to part-time employees that work 30 or more hours per week. The rest either don’t cover any part-time employees, require them to work more than 30 hours a week to be eligible, or impose other eligibility requirements.

In addition, mini-med, or limited benefit, plans, which typically limit coverage to $50,000 to $100,000 per year, will no longer be an option for part-timers or other employees who work an average of 30 or morehours a week. Mini-med plans are currently offered by 7% of employers with 500 or more employees and 20% of those with 20,000 or more.

Only about a third (38%) of employers don’t have any of the three red flags – for unaffordable coverage, ineligible part-time employees, or mini-med plans – while close to half (48%) have one red flag and 14% have two. Among large employers, about half (53%) don’t have any of these red flags, but 39% have one and 7% have two.

Large wholesale/retail employers are the most affected by these three reform provisions. Only 31% of wholesale/retail employers with 500 or more employee have no red flags; 66% have one and 3% have two.

Plan Design Changes

Mercer noted that these aren’t the only provisions affecting employer plans. Employers will have to discontinue lifetime maximums, most annual dollar maximums, and cost-sharing on preventive care – even something as modest as a $10 copay.

The use of lifetime benefit maximums, banned under PPACA, currently is the rule rather than the exception. About three-fifths of all employers (61%) and nearly three-fourths of large employers (71%) have lifetime benefit maximums in their PPO plans. Lifetime maximums are less common in HMOs, where 25% of sponsors currently use them.

In addition, most employers will have to lower the cap on the amount that employees can contribute to their health care flexible spending accounts. PPACA requires that contributions be limited to $2,500 but the median cap among large employers is currently around $4,500. However, the average employee contribution is currently only around $1,500, so the change will not have a significant impact on most employees, according to Mercer.

Mercer analyzed data collected through its 2009 National Survey of Employer-Sponsored Health Plans to quantify the extent to which employers will be affected by certain key health care reform provisions.